May's latest monthly ethanol output report from the U.S. Department of Energy (released July 31) continued this fuel extender's strong expansion-with another record 406,000 barrel daily rate, up 15,000 from April's previous best pace. Overall, May's production also hit a new high just before the summer driving season began-with 528 million gallons, up 36 million from April. This was the first time that U.S. ethanol output exceeded the one-half-billion mark in a calendar month. 

Interestingly, U.S. ethanol plant capacity utilization increased by 0.9% to 105.2% in May-despite 162 million gallons of new capacity being added to the Renewable Fuel Association's operating plant list (according to its Web site that month). U.S. ethanol stocks did rise 159,000 barrels to 8.95 million in May vs. the 1.24 million barrel decline of 2006 (when producers were using their reserves to supply customers while they finished up some maintenance downtime). This year's 6.68 million gallon rise in stocks remains modest vs. the 30 million gallon jump in May's U.S. blending demand.

Three additional biorefineries came online in July, bringing 152 million gallons of new capacity to the industry-which now totals 6.48 billion gallons. This expansion is encouraging, but an ongoing backlog of plant construction totaling about 550 million gal. keeps us cautious that winter weather problems and component manufacturing delays could still curtail old-crop corn's ethanol demand by 30-40 million bu.-adding a small amount to new-crop beginning supplies. The current discount of ethanol to gasoline prices will prompt an increase in utilization. However, finalization of the 2007 U.S. Energy Bill (which will push energy firms to expand their blending facilities into new areas of the country) would be a better signal for the ethanol industry to continue its expansion and help solidify corn's 3.4-3.5 billion bu. 2007/08 demand and beyond. With this year's corn plantings expanding 14.5 million acres, production concerns from weather have been reduced. Grain producers should use December swings to the $3.46-$3.53 range to complete their final 10%-15% of old-crop sales and have a minimum new-crop sales done so as not to market supplies during this fall's likely storage crush (which could pressure prices to the $3.00 area). The need to limit significant corn acres being switched to wheat and soybeans (to keep adequate corn supplies longer term) should provide a strong post-harvest cash price recovery once this fall's excess supplies are off the market.